Chatham Lodging Trust — Q2 2020 Form 10-Q
Business context and period. The company owns upscale extended-stay and select-service hotels. This unaudited report covers the quarter and six months ended June 30, 2020. Chatham wholly owned 40 hotels with 6,092 rooms and held minority interests in two hotel joint ventures (JVs). Results were severely affected by the COVID-19 pandemic and travel restrictions.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $20.2 million | $87.9 million | $80.4 million | $163.6 million |
| Operating income (loss) | ($18.6 million) | $16.1 million | ($36.3 million) | $26.0 million |
| Net income (loss) | ($27.2 million) | $9.5 million | ($55.3 million) | $11.2 million |
| Net income (loss) attributable to common shareholders | ($26.8 million), or ($0.57) per share | $9.4 million, or $0.20 per share | ($54.6 million), or ($1.16) per share | $11.1 million, or $0.23 per share |
| Operating cash flow | Not stated separately | Not stated separately | ($15.7 million) | $37.8 million |
- Q2 same-property RevPAR fell 76.9% year over year to $33.17, as occupancy declined to 33.8% from 83.3% and ADR fell 42.9% to $98.20. For the first half, same-property RevPAR declined 51.5% to $64.44.
- Q2 Adjusted Hotel EBITDA, a non-GAAP measure, was negative $2.3 million versus $36.1 million a year earlier. First-half Adjusted Hotel EBITDA was $13.9 million versus $62.3 million. These supplemental measures are not substitutes for GAAP results or cash flow.
- Six-month investing cash outflow was $20.5 million, including $10.4 million for hotel improvements and $10.1 million for development. Financing provided $61.8 million, principally from net revolver borrowings.
- At June 30, cash and cash equivalents were $36.9 million; restricted cash was $8.9 million. Total debt was $665.4 million before unamortized debt costs, including $173.0 million drawn on the $250 million revolver. Management reported a 36.6% leverage ratio and an average debt rate of approximately 4.3%.
- The May credit-facility amendment waived certain financial covenants through March 31, 2021, permitted borrowing up to the facility limit, and required minimum liquidity of $25 million, defined to include unrestricted cash and available facility capacity. The amendment also increased restrictions on debt, dividends and capital spending and pledged equity in 18 borrowing-base hotels. Chatham reported compliance with the modified covenants at quarter-end.
Material changes and unusual items
- Revenue fell 77.0% in Q2 and 50.9% in the first half, primarily from pandemic-related declines in hotel demand. The company reduced hotel operating expenses, but costs did not fall as quickly as revenue.
- Chatham recorded a $15.3 million impairment of its Inland JV investment, reducing its carrying value to zero, and stopped recognizing further Inland JV equity-method losses. First-half loss from unconsolidated entities was $5.3 million.
- Other charges were $3.0 million for the first half, primarily severance and accelerated vesting costs related to the departure of the former Chief Investment Officer, plus insurance deductibles.
- Operating cash flow shifted from $37.8 million provided in the first half of 2019 to $15.7 million used in the first half of 2020. Cash, cash equivalents and restricted cash together increased to $45.7 million, supported by borrowing.
- Common dividends were suspended after the March 2020 payment. The first-half declared distribution was $0.22 per common share, compared with $0.66 in the first half of 2019.
Outlook, risks and contingencies
- Management said the pandemic’s duration and financial effects were highly uncertain, expected significant RevPAR declines to continue until travel concerns ease, and stated that it believed liquidity was sufficient for obligations for the foreseeable future. No quantified earnings or RevPAR guidance was provided.
- The NewINK JV missed April and May 2020 debt-service payments; senior interest for those months was funded from restricted reserves. It paid the senior payment due June 7 but missed the July 7 senior payment and had not paid mezzanine interest since April. The default could lead to foreclosure; the JV was seeking forbearance. Its debt is non-recourse to Chatham except for customary carve-out guarantees and does not cross-default Chatham’s debt.
- The Inland JV defaulted on its April 2020 debt service and subsequent payments and did not obtain forbearance. After quarter-end, a court-appointed receiver began taking control of its properties and replacing hotel managers. Its debt is also non-recourse to Chatham except for customary carve-outs and does not trigger a cross-default.
- On August 4, 2020, a Chatham subsidiary agreed to a $40 million loan to fund remaining Warner Center hotel construction costs; $1.5 million was funded at closing. The four-year loan bears LIBOR plus 7.5% (with a 0.25% floor), with a potential spread reduction after the property achieves a 9.0% debt yield, and is guaranteed by the Operating Partnership.
- Chatham reduced planned 2020 capital expenditures by approximately $10 million and expected another $4.0 million of existing-hotel spending in the rest of 2020. Estimated remaining costs for its Los Angeles-area development were $39.5 million; total project cost was estimated at approximately $70 million.
- California wage-and-hour class actions involving hotel manager Island Hospitality Management had settlements approved in two cases and settlements awaiting approval in related cases. Accrued estimated exposure was $0.1 million and $0.6 million, respectively.
Key facts for investors to verify
- Subsequent hotel demand, occupancy, ADR and RevPAR trends, and the pace of hotel cost reductions.
- Available revolver capacity and compliance with the $25 million minimum-liquidity requirement and other amended facility restrictions.
- Developments in NewINK and Inland JV defaults, foreclosure or receivership actions, and any potential exposure under non-recourse carve-out guarantees.
- Cash needs and funding terms for the Warner Center loan and remaining hotel-development and capital-expenditure commitments.
- Whether and when dividends may resume; management said it intends to pay distributions required for REIT status, while the board determines actual dividends.